Memorandum submitted by Roger Ford
INTRODUCTION
Passenger Rail Franchising has evolved significantly
since the first franchises were let in 1995. I hope this submission
will help the committee's understanding of the factors which have
produced the current process.
1995 VERSION 1.0
IDEOLOGICAL PURITY
Franchising was intended to bring competition
to the passenger railway. Initially it was believed that operators
would compete with rival services on the same route—for
example for commuter traffic. This was epitomised in Roger Freeman's
separate trains for "toffs and typists".
To encourage competition operators would bid
for "slots" (paths in railway terminology) on an eight
weekly cycle—the "Peterborough process".
It soon became apparent that railway operation
was more complex than the political theorists thought and that
competition in a novel and untested market could deter bidders
or inflate subsidies.
As a result Moderation of Competition (MoC)
was introduced. It was intended that the initial franchises would
be let as monopolies, but that competition would be introduced
gradually over time.
The Treasury was unhappy that this meant that
the effects of competition, needed to increase efficiency and
reduce costs, would be weakened. Competition on the track was
replaced by competition for the franchise. The Treasury wanted
frequent re-bidding to keep franchisees keen and proposed five
year franchise terms or even shorter. The Office of Passenger
Franchising argued that some stability was needed and the standard
term became seven years.
Where investment in new trains was part of the
franchise commitment, for example LT&S (now c2c) West Coast
and Cross Country, 15 year franchises were granted. It should
be noted that franchises do not own assets and so do not "invest".
The assets are owned by the infrastructure company (Railtrack/Network
Rail) and the Rolling Stock Companies. Access and train rental
charges represented roughly two thirds of the costs of a franchise.
The train operator was responsible for operating costs—mainly
staff.
Franchises bid against the 1994 timetable. In
the case of heavily subsidised routes, a minimum level of service
was specified—the Public Service Requirement. It was expected
that franchisees would be commercially incentivised to run additional
services.
A majority of these first generation franchises
was bought by bus operators. Based on their approach to bus Regulation
they had assumed that the secret of success was to cut staff costs
and numbers. In fact, they soon discovered that British Rail had
run a tight ship and had left little scope for cost cutting.
For this and other reasons, some 50% of first
generation franchises failed and had to be rescued. In some cases
failing companies were bought up by larger operators. However,
during this period subsidies had fallen, as expected, but largely
through over-optimistic bids, particularly with the later, Regional,
franchises.
1999 VERSION 2.0
STRATEGIC VISION
Transfer of responsibility for franchising from
OPRAF to the new shadow Strategic Rail Authority coincided with
the arrival of Sir Alistair Morton as Chairman. Government policy
was also changing and, in the 10 Year Transport Plan published
in 2000 would be based on long term investment in the railways
by the private sector.
Morton set out to implement this. He believed
that the key to increasing investment was to involve the Franchisees.
As remarked above, a franchise was an asset free zone and the
standard seven year term meant that it would be impossible to
generate a return on long term railway assets.
He proposed 20 years franchises in which Franchisees
would invest in infrastructure upgrades through "Special
Purpose Vehicles" (SPV). I could never really work out how
an SPV would operate, but Go-Ahead (Southern) and Stagecoach (South
West Trains), spent several millions trying to set up and fund
SPVs jointly with Railtrack/Network Rail.
Laing with Chiltern was the only franchisee
able to make the SPV work. But this was a simple franchise, infrastructure
investment was simple and the owner was in the construction industry.
2002 VERSION 3.0
RESTORING STABILITY
With appointment of Richard Bowker as SRA Chairman,
the Morton vision was finally abandoned and franchising reverted
to the original asset free/seven year term model. The year before
the mechanism for funding the infrastructure provider had also
changed.
In his Access Charge Review the Rail Regulator
increased Railtrack's income. In response, the Government chose
to pay some of the increased funding as direct grants. Previously
all Railtrack's income had come through track access charges paid
by the TOCs.
Since that decision the subsidy for franchises
has failed to reflect their true costs. Direct grants increased
substantially in the Access Charge Review which came into effect
in April 2004 I would advise the committee to treat all references
to the cost of franchising with caution.
At the same time, Railtrack's financial problems
were affecting franchises, notable Virgin. Failure to deliver
the improved infrastructure on time meant that in mid 2002 both
Virgin franchises had to be rescued.
SRA decide to run these, and other rescued franchise,
as management contracts. An annual budget was agreed and the franchise
was run with the franchisee being paid a percentage of the revenue
as a management fee.
2004 VERSION 3.1
INCORPORATING BENEFITS
Under Richard Bowker SRA considered the subsidy
profile as an increasingly insensitive criterion for evaluating
franchise bids. The aim was to pick companies that would deliver
but also look beyond the basic cost and take into account the
marginal benefits in socio-economic terms of each bid. The Intercity
East Coast franchise, with its additional Leeds services based
on a small electrification "infill", is a classic example.
This is best categorised as value for money
versus lowest cost.
2005 VERSION 1.1
ULTRA-FUNDAMENTALIST
With the abolition of SRA, DfT Rail took over
responsibility for franchising. The new policy, which has emerged
this year, brings the passenger railway under more-direct control
from Whitehall than ever before.
1. DfT Rail specifies the timetable to be
run in great detail.
2. Companies qualify to bid against an Accreditation
Questionnaire with a heavy bias towards European Quality Management
practice rather than demonstrating appropriate railway experience.
3. Bidders must demonstrate that they can
deliver the specified timetable. Selection is than based on lowest
subsidy/highest premium.
4. There appears to be no scope for service
innovations, proposals for additional capacity (more trains or
improved infrastructure), or other incremental enhancements.
5. If a franchise runs into difficulties
there will be no rescue. The option is take the financial pain
or hand in the keys.
CONCLUSION
A key concern
We now have the worst of all franchising worlds.
Service levels are set for a seven year term, based on the lowest
cost bid to run the specified timetable. This sets the existing
railway in aspic.
Traditionally the railway in Britain has advanced
in incremental steps based on improvements in technology and commercial
policy.
For example, under British Rail, there was one
main line "modernisation" project each decade. The 1960s—West
Coast electrification; the 1970s—Great Western and InterCity
125; the 1980s—East Coast electrification.
On a 30 year cycle (the typical life of railway
assets) West Coast should have come around again in the 1990s,
but this was deferred because of privatisation. Great Western
would then have followed in the current decade.
Great Western has been deferred to after 2010,
but there is no coherent plan for its development to meet new
needs in the 21st Century—for example electrification or
providing more capacity in the London-Bristol/South Wales corridor.
DfT Rail lacks any strategic view and seems
happy to let a series of seven year franchises based on the existing
railway. The contrast with the expansive attitude in what I consider
the golden age of the 1980s is at odds with talk of a wider role
for railways in future transport policy.
4 July 2006
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